INSIGHT: Trapped in an extended cycle peak

27 July 2007 17:48  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Nova Chemicals has identified further ethylene project delays that it expects to help maintain industry operating rates over the next few years.

Dow Chemical says its big Oman project, that was included as a cancelled project on the Nova list, is still viable. The hold up is down to gas supplies and capital costs, says Dow chief executive Andrew Liveris.

It looks like the biggest ethylene chain businesses are heading for a big hit some time towards the end of the decade. The billion dollar question still is when?

Chemicals players in North America, particularly, have their own current problems. Look at the hits revealed this week to businesses selling into downstream domestic construction and automobile markets.

The problems that beset these two key chemical consuming industries have hurt chemicals. They will continue to do so.

Companies from Dow and DuPont to ExxonMobil and Rohm and Haas have felt the pain.

European businesses appear to have held up well and indeed shown some welcome growth. Developing market growth across the sector has continued strong.

Dow and Nova continue to take big bets on an extension of the commodities cycle. Earlier this year it looked as though Dow could be transformed quickly with new so-called “asset light” ventures that would shift the portfolio towards higher added value markets.

At the same time Dow’s Liveris said the company was creating a number of new market-facing business clusters.

This past month Dow has formed a $1bn sales cellulosics operation, Dow Wolff Cellulosics. The most recent of its larger step-out deals was the purchase of Wolff’s Walsrode from Bayer for $540m.

Liveris said on Thursday that Dow had reviewed several M&A (merger and acquisition) proposals but few had been a good fit. "We will do the right deal at the right time," he said.

Financial analysts now believe that Dow might hold out for more profits from its commodities businesses during an extended chemical industry cycle peak. The strategy is prudent, Citigroup, for instance, says but the bank reckons it will take longer to transform the company.

Liveris has often talked about riding the crest, or rather along the plateau of the cycle. Dow’s view, aligned largely with that of Nova and other big North American olefins players, is that the cycle plateau can persist for longer than some consultants and others have predicted – if demand growth holds up.

Ethylene and other large project delays, brought about by extremely tight global engineering and construction markets, will continue to work in the chemical industry’s favour.

Commodities then may not be a bad place to be for a while longer.

JP Morgan’s Jeffrey Zekauskas, talks, in a note to clients of Dow Chemical’s “Life on the ridge”.

The cyclical downturn will come but Zekauskas says the sector is now in the period of the downward sloping ridge.

Dow appears to have entered a period of EPS (earnings per share) decrease, he says. Global ethylene capacity and demand should remain roughly balanced until the second half of 2008.

“Short of large unexpected outages, it is unlikely that we will return to periods of peak profitability,” he suggests.

Dow is using its cash to forge new market-facing downstream business but is taking its time. It is also seems in no rush to purse actively its “asset light” unless the right deals can be struck.

Dow is working hard on India, reports suggest. It has its huge project with Saudi Aramco and other Middle Eastern ventures, such as that in Oman, to keep it busy.

Its bet currently looks mores squarely based on commodities than in only the recent past.

Liveris insists the company is “implementing a strategy that can deliver a consistent earnings growth profile through the years ahead”.

By: Nigel Davis
+44 20 8652 3214

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